What This Parking Garage Has to Do With 38 Studios

Perhaps unsurprisingly, the River Park Square Parking Garage in Spokane, WA has not been a major topic of conversation in Rhode Island.  But it should be.

You see, it was paid for by a nonprofit semipublic economic development corporation known as the Spokane Downtown Foundation.  Lacking the credit for the loan, the Spokane Downtown Foundation issued $31 million in moral obligation bonds backed up by the credit of the City of Spokane.  Then, as revenues from the parking garage came in under budget, the Downtown Foundation was forced to default.  Start to sound familiar?

Here comes the key bit:  The credit rating of the Downtown Foundation plummeted to D (ultimately winding up as a Not Rated), but the credit rating of the city’s general obligation bonds did not meet nearly so dire a fate.  Anticlimactically, Moody’s knocked the general obligation bonds down only one notch to A2.  S&P, however, took a more critical view, knocking them down to BBB.

Perhaps the most critical question swirling around the 38 Studios fiasco is what would actually happen if we defaulted.  The travails of the River Park Square Parking Garage offer a rough sketch:  The EDC’s credit rating would implode, but Rhode Island’s main general obligation bonds would see a much smaller effect.  How small an effect remains uncertain, unfortunately.

My guess is that our hit would be substantially less than Spokane’s.  Because of a legally murky agreement to back up the debt with municipal parking meter revenues, there was significant doubt about the legal ability of Spokane to default on its moral obligation bonds (a concern not applicable to the 38 Studios bonds).  In fact, the ensuing tangle of lawsuits ultimately forced the city to repay the bonds, although Spokane did receive $11.2 million from a settlement.  Moreover, the parking garage bonds represented a much larger portion of Spokane’s debt than the 38 Studios bonds represent to Rhode Island, and the parking garage scandal probably did reduce the ability of the city to repay its general obligation bonds.  Given the $20 million in legal fees the city ultimately wound up shelling out, those concerns were amply justified.  Defaulting on the 38 Studios debt, on the other hand, would likely not meaningfully damage our ability to repay our general obligation bonds.

And then there’s the fact that credit markets have not punished us for a much larger default on pension obligations–obligations that actually were legally binding.

Unfortunately, I was not able to answer the most critical question–how the downgrade affected the interest rate.  So I hope someone with more time and knowledge of bond markets than I will look into the matter more closely.

Let me be clear.  Although I do suspect that defaulting on the 38 Studios bonds would save us money in the long run, I am by no means certain.  But because of the River Park Square Parking Garage, we can constrain the bounds of speculation.