bondholders – RI Future

May 21, 2014May 24, 2014

Mattiello is meeting with ratings agencies, but what will he learn?

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House Speaker Nick Mattiello is in New York today meeting with representatives of Standard and Poor’s and Moody’s, the two biggest of the credit ratings agencies. (No word on how Fitch feels about the snub.) It’s not perfectly clear what he thinks he’s going to get from this trip. Perhaps he’s going to look into the Moody’s representatives eyes and “get a sense of his soul” the way George W. Bush did with Vladimir Putin? That went well, didn’t it?

So what will Mattiello find when he meets with these guys? I predict he will find earnest, intelligent, kind, and solicitous people. They will make sympathetic noises about the awkward plight of our poor state and the unwise choices made by our previous governor and speaker of the House. They will understand immediately the ramifications of our difficult position. But they will point out all the worst-case scenarios, because they are also people who believe very strongly that the end of western civilization will be nigh if a state is allowed to renege on a commitment they imagine it to have made. Where, I ask you, will their commissions come from if the bond market changes even a tiny bit? They will see their job in these meetings as making Mattiello’s hair stand up even straighter than it usually does, and will probably succeed.

There are times when personal contact is misleading. After all, the earnest, intelligent, kind, and solicitous people he will meet represent agencies that are deeply corrupt, in the pay of the banks whose bonds they rate, constantly trying to curry favor with the very institutions they are supposedly there to police, while abusing the powerless. There have been virtually no changes to their business model since that very business model led our financial markets to the verge of collapse in 2008.

If Mattiello was in search of actual answers to actual questions, he would do far better to spend time interviewing the bond buyers for the insurance companies who hold most of our state’s bonds. Those are the people whose opinion will actually be important, because those are the people who actually give us the money we need to borrow. I’m more interested to know whether they are capable of reading a bond prospectus and understand the difference between a general obligation bond approved by the voters and a bond that says all over it that it is not such a thing.

There is a class of questions out there that cannot be answered by asking them. I learned years ago, for example, that I cannot learn whether today is opposite day by asking my daughter. If it is opposite day, she will say no when I ask, and if it is not, she will also say no. I have to think of another way to answer the question. There’s a lovely discussion of exactly this point in Snow et al’s 1991 book, “Unfulfilled Expectations: Home and School Influences on Literacy“, where the authors speculate about the futility of having well-dressed Harvard education researchers with clipboards ask poor mothers how many times a week they read to their children.

Here are some other questions whose answers cannot be found by asking:

“Hey Mr. Rich Person, will you leave the state if we raise your taxes?”

“Hey Mr. Business Owner, will you bring jobs back to this state if we lower your taxes?”

“Hey Mr. Bond Rater, will you leave our state bond rating alone if we let an independent agency default on its bonds?”

Incalculable damage has been done to our state by people who imagine that the way to answer questions such as these is simply to ask them directly and take the answers at face value. (Typically by people who will then call me naive.)

The public nature of Speaker Mattiello’s trip, and the people he intends to visit and to hear imply that what is going on here is not actually a fact-finding trip, but Kabuki theatre, the beginnings of political cover for making the unpopular decision to give in to the threats and repay the bonds. If true, this is unfortunate. Perhaps we can only hope that somehow weak knees will ward off the tax-cut fever that I hear is infecting the back rooms of the House this past month.

June 25, 2013June 25, 2013

Left and right agree on 38 Studio bond payment

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Perhaps the most telling tale of the 2013 budget process is not about what we do or don’t invest in, but rather the uncommon affiliations one such spending decision has brought to light. Many on the left (progressives) and the right (Republicans) seem to disagree with the majority of moderate Democrats that Rhode Island should pay 38 Studios bondholders.

This was first illustrated by Randall Rose and Occupy Providence’s great effort to put together a panel of diverse local experts, moderated by WJAR, to discuss the issue. Occupy Providence has long opposed paying on the bonds and it partnered with the Stephen Hopkins Center, a grassroots local libertarian group to call attention to the matter by having economists, college professors and bond buyers vet the pros and cons. Meanwhile, the legislature hosted a one-sided lecture on the merits of repayment.

House Republicans responded by vowing to vote against the budget bill today if the $2.5 million line item is included. Whether this is a principled stand against Wall Street-centric economic policy or simply political gamesmanship over the budget remains to be seen. Nobody, not even the ratings agencies, know which is the more fiscally-prudent path at this point and anyone claiming to support or oppose the $2.5 million line item based on such knowledge either doesn’t get it, or is lying (what some politics).

But now Sam Bell and Gus Uht, two influential members of the Rhode Island Progressive Democrats, have called upon liberal lawmakers to reject the budget proposal as well. Read their pieces here and here. They both mention the 38 Studios bonds, but also cite several other issues progressives have with the budget bill, such as cuts to RIte Care, pension payments and municipal aid.

The progressive caucus in the House has at least twice the membership as does the Republican Party. So if both these caucuses come together to oppose the budget, leadership would all of a sudden have a legitimate math problem on its hands. Which won’t happen, of course, because the progressive caucus is more closely-aligned with moderate Democrats in politics if not in economic theory.

What’s been really interesting to me is that pundits on both the left and right have used similar logic to call for default.

Here’s what Uht wrote in a previous post:

“Moral Obligation” bonds are a fabrication of Wall Street, created to satisfy its greed. The Economic Development Corporation, not the state, issued such bonds for 38 Studios … 38 Studios was not described as a sound investment to either the prospective investors or the insurer, yet they signed on anyway. They gambled and lost. This is not Rhode Island’s responsibility, but in the vague, smoky-back-room fashion of “moral obligation” bonds, it might hurt our reputation for being a good bond issuer if we don’t obligingly, voluntarily make it our responsibility.

Andrew Morse takes the debate one step further writing that the electorate should not even vote for politicians who support the payment (according to the headline).

This idea of government will be imposed upon Rhode Islanders by their state officials and Wall Street working together, unless Rhode Islanders are willing to reject politicians who use their offices to enforce the finance industry’s extra-legal understandings of how debt should work, and reward those who work to make sure that the finance industry lives under the same constitution and laws that everyone else does.

I agree with both Uht’s and Morse’s sentiments, but don’t think we should take such a severe stand for these values on either the budget bill or the next election. I do however think legislators have a moral obligation to oppose the budget bill based on the cuts to RIte Care, and if you read Tom Sgouros’ post from yesterday you probably do too.

But with respect to the 38 Studios bond payment, Imost Rhode Islanders probably agree with what progressive Rep. Art Handy told ABC6’s Mark Curtis:

I am of the opinion that we probably should pay it. I actually emotionally kind of think we shouldn’t. But intellectually I think I am at a place now where I feel like we probably should.

Me, I’m still standing behind what I wrote in a piece called “On moral obligations” back on April 18:

…I’m really hoping it ends up being financially advantageous not to pay the bondholders – that way we can save money AND we’ll see who in Rhode Island is a real small government conservative and who is acting like a friend to the taxpayer when they are secretly just advocating for Wall Street and corporate America’s interest in our state government.

June 23, 2013June 24, 2013

Over 1,000 sign petition against 38 Studios bailout

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On Monday June 24th, the petition against the 38 Studios bailout will be brought to the State House for a ceremonial delivery. So far, over 1,000 Rhode Islanders have signed the petition, and the number continues to grow. The petition delivery will be at 4:15pm sharp, at the Smith Street entrance to the State House.

The current 38 Studios bailout is unpopular, as the 38 Studios deal was from the beginning. Although the petition against the bailout was put together by Occupy Providence, which has been protesting against the planned 38 Studios bailout for over a year, there are many other groups opposing the bailout across the political spectrum. The libertarian-leaning Stephen Hopkins Center for Civil Rights and Occupy Providence jointly sponsored a debate about the bailout (available on video). Although many of the leading bailout advocates were invited to appear on the debate panel – Gov. Lincoln Chafee, Treasurer Gina Raimondo, the RI Economic Development Corporation, and Moody’s bond-rating agency – none chose to take part in this open debate, although they are frequently quoted in the media where they don’t have to confront the arguments of leading bailout opponents. Now, even those who have sympathy for the bailout have been pointing out that the case for a bailout is problematic.

Rhode Islanders who oppose the bailout can sign the petition and, if they like, attend the State House petition delivery rally at 4:15 Monday. The RI House will be voting soon on a budget that includes 38 Studios bailout money, but many state legislators are committed to voting against the budget until the bailout money is removed. State House leaders traditionally try to finalize everything about the budget in one night’s marathon House session, and that session is scheduled for this Tuesday. However, the 38 Studios bailout is unusually contentious and controversial, involving years of major expenses, and whatever happens in Tuesday’s session, there is a good chance that Rhode Islanders will be continuing to fight this bailout well past Tuesday. The online petition will remain open for signatures during and after this year’s budget process.

June 20, 2013June 20, 2013

RI’s class system of extra-budgetary pay priorities

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Not only do Rhode Island lawmakers often embed policy proposals into the state budget, they also sometimes embed budget proposals into other areas of state law. The Ocean State is infamous for having the only law that in the nation that guarantees Wall Street gets paid before retirees, but we also have a law that places payments to retirees’ above other communal concerns.

Here’s what the Providence Journal reported Wednesday about a little-discussed law:

Union officials lobbied from the sidelines for the state to make good on a promise made after the state’s 2011 dramatic pension overhaul froze cost-of-living increases to Rhode Island’s retired public workers until the fund is in better financial shape.

The law required that any state money that comes in — over and above the state’s official revenue estimate — go into the state pension fund. This year that would have totaled $12.9 million. But Chafee sought to eliminate this provision, and carry the money forward into next year’s budget.

To the dismay of the unions, the lawmakers agreed, prompting this response from J. Michael Downey, president of Council 94, American Federation of State County and Municipal Employees: “Shortchanging employees’ pensions, while taking care of Wall Street bondholders and restoring tax credits, is immoral.”

I would agree with Downey’s moral compass on this one. It is immoral to shortchange middle class retirees and not companies. Similarly, I feel it is immoral to shortchange the homeless and struggling cities and towns while taking care of middle class retirees.

Whether either scenario is financially advantageous to the citizenry is another matter altogether. I would argue deciding whom to take care of and whom to shortchange based on such rationale is what makes it immoral. Not that we don’t have to make immoral decisions sometimes, we should just recognize it isn’t necessarily benevolent. In other words, we have no moral obligation to be prosperous, but we do have a moral obligation to do the greatest good for the greatest amount of people. Intentionally obfuscating these two often competing values is very immoral, by the way.

To my way of thinking, Rhode Island’s economy would be better served if we ended homelessness than if we fully funded our pension system. I also think we have a higher moral obligation to end homelessness than to fully fund pensions. Similarly, it may be true that our economy would be better served if we fully funded our pension system than if we fully funded our debt obligations. But I’m certain we have a higher moral obligation to fully fund commitments to people than to credit markets.

Now some may agree with my economic and moral theories, and they may be right to do so. And what makes the most moral and/or economic sense at one time might not be the best decision at another time. That’s why it’s bad policy for state lawmakers to codify outside of the annual budget process a class system of financial obligations.