The fallout from the 38 Studios debacle isn’t going away anytime soon.
The failed video game company became a major issue on the campaign trail this week, with Gov. Lincoln Chafee blasting two of the candidates vying to succeed him for their support for refusing to pay tens of millions owed for state-backed bonds.
Chafee, in a statement, went as far as to call the Republican gubernatorial hopefuls – Cranston Mayor Allan Fung and businessman Ken Block – “unfit” to serve as governor because of their position on the issue. He cited the potential impact on the state’s bond rating and well as implications for ongoing 38 Studios litigation.
“As we look to continue this positive momentum, candidates for governor should be espousing positions that take into account our state’s long-term future, not the instant gratification of appealing to primary voters,” Chafee said.
Block and Fung were swift in their response.
“38 Studios burned up our money and went bankrupt on Governor Chafee’s watch,” said Block. “He did nothing and was clearly asleep at the wheel as every aspect of this deal has been a disaster.
“These bonds are moral obligation bonds and are not owed by the taxpayers of Rhode Island,” Block continued. “I find it unconscionable that the governor would put insider Wall Street investors ahead of the taxpayers who elected him. These investors were adequately warned and knew the risk they were taking when they purchased the bonds.”
“The lack of understanding begins with Governor Chafee, whose commitment to the institutional bondholders and other financial elites far outweighs his concern for the average Rhode Island taxpayer,” said Fung. “Taxpayers simply cannot afford this added burden.”
The Democrats seeking the governor’s office – General Treasurer Gina Raimondo, Providence Mayor Angel Taveras and Clay Pell – all support repaying the bonds, which were insured by Assured Guaranty.
Where, then, should voters stand on this issue? Politics are clearly at play, but compelling arguments can be made on both sides. The point about the risk inherent in such an investment is well taken, as is the injustice inherent in Rhode Island tax dollars being used to repay those who knowingly took that risk.
Yet it does seem clear there would be very real consequences for failing to repay. Standard & Poor’s Ratings Service has warned of a credit downgrade and already put in place a negative outlook on the state as the debate continues. Assured Guaranty has said it will pay its obligation regardless, but fully expects the state to pay as well, hinting at the legal action that would likely ensue.
More than that, however, failure to pay would send a powerful – and dangerous – signal to the state’s potential investors and partners. Included in the stump speech and platform of virtually every candidate for public this year is rhetoric regarding economic growth and job creation, about the need to revitalize the state and foster a favorable business climate.
Reneging on a commitment of tens of millions would seem counterproductive in achieving those objectives. A significant blow to Rhode Island’s credit rating as a result of nonpayment would be a major hindrance to positive progress.
There are ways to address the rightful anger surrounding the 38 Studios deal, and to correct, as best as possible, the wrongs committed. Any criminality associated with the matter should, of course, be prosecuted. Voters should strongly consider their choice in leadership this November in an effort to avoid any such situation in the future.
But failure to make good on what is known, quite literally, as the state’s moral obligation makes little sense. We cannot move forward, truly, until we have effectively addressed our past, painful though it may be.