A couple of weeks ago I felt the 38 studios issue was ripe and I decided to say what I thought needed to be said. No Governor was going to preside over dishonor of those bonds. Only two states have defaulted on such obligations and both eventually paid them back. I can’t imagine a worse story for Rhode Island in the world economy than we made a bad bet, borrowed a lot of money, lost, and then tried to weasel out of it. What a disgrace.
A lot is made out of “we don’t have to pay them back” because they aren’t a voter approved obligation against the general revenue of the state. That’s true. The voters didn’t vote on them. But, when the EDC issued and sold those bonds, under the seal of the State of Rhode Island and its Economic Development Corporation, investors certainly viewed them without regard to the underlying quality of 38 studios. The state of Rhode Island was saying “Don’t worry, this is us, you know us. Would we let you down? This has been vetted. It’s state approved. “Its legit.” “ It’s money in the bank.”
So, we pretty much have to own this obligation or be a disgrace and the markets will not forget. Some say we should be thumbing our nose and daring the market to do something about it. That’s a bold statement to make from the barstool or the recliner and even the radio booth, but as Governor, you know where the buck stops. If all of a sudden every bit of borrowing that has any sort of public stamp on it in Rhode Island is less interesting to investors, it will cost more to make it interesting. And, there are all sorts of bonds out there funding quasi-public ventures, such as the Airport bonds and, I imagine, and the House speaker alluded too after talking to Wall Street last week, myriad others.
Some commentators suggested that a “moral obligation” is no obligation at all. That’s sort of rewriting the facts because the money was paid when the bonds were sold. The funds were received. That’s a real obligation to provide back the value promised in return for those funds which value was, wait for it… the funds back with interest. If we took the money, just took it, with no intention to keep faith with the promise, to keep our “bond,” what are we?
But the whole idea of “moral obligation bonds” is a fuzzy concept that seems to offer a way out of an unpleasant reality. Lots of the objectors to paying the obligation argue that we shouldn’t have to pay because there had to be underlying corruption and they never voted on it and it was all done by “they” and “them.” We have no remote tyrant king to blame. The sovereign people of Rhode Island are the government. Some want us default and dishonor as if they fantasize, “Burn the Gaspee again.” It’s our Gaspee. We need to rebuild or build too many things to have our credit damaged. We don’t want to burn our credit to the waterline just because we ran ourselves aground.
The “elect” of our sovereign people, our representatives and senators in the General Assembly approved the deal. The deal was vetted by our very own “Shark tank” the Economic Development Corporation, a creature of our government. There is no “them.” It is us. “You” are us. For six years I’ve been hearing people shout individual sovereignty and shout the right of the state’s people under the tenth amendment. That’s us. When our legislature does something, that’s us.
Of course the retort would be, “well that’s the problem.” Sovereign individuals don’t have to pay back obligations the legislature gets us into if they don’t like it, right?
More than a moral obligation
So let’s recast this a little differently as just a deal among sovereign individuals, and the bond is blessed and sponsored, the bond is sold and the promise made, and the money received, how’s it going to go down if the person who received the money lets some family member exhaust the funds before there’s a return? Someone is going to shrug and say it’s just a moral obligation? Someone is going to hold out his empty pockets and say “you should’ve known better?” Someone is going to start making excuses? Someone is going to blame everyone under the sun but themselves? I think someone is going to get whacked. And the family will have a harder time borrowing again. Other lenders will want to be repaid right now. Ah, life in the libertarian paradise, how sweet it is. But back to what the founders called “Society” that which we live together in with our elected government keeping things sane.
One of the strangest excuses is that we shouldn’t pay because only by not paying will “the corruption be exposed.” I guess the fantasy here is that the insurance company will hire it’s own investigator“ Banicheck” for a “Cool Million back from 1970’s television land and he will expose the corruption and get the insurance company his money back. I think they might just sue Rhode Island. The insurance on the bond insures the stream of income for the investors, not Rhode Island. I think it’s more likely that the continuing appropriations to repay the 38 studio bonds will keep rubbing salt in our wounds and keep us interested in overturning the stones for a long time to come.
That leads to the RI House Speaker Mattielo’s decision not to authorize subpoenas for investigation of 38 studios. “ We’re not investigators” he says. Boy you can say that again. The fact is the General Assembly should have appointed a special independent counsel to conduct and coordinate criminal investigation and civil litigation on behalf of the state. That way you can proceed with both in the most appropriate way. That way you don’t risk legislators on a committee complicating or compromising criminal investigations inadvertently.
Right to raise questions
The truth is Chafee was right when he raised questions about 38 Studios. Remember the media thought he was a little goofy challenging the sock? And Chafee’s right that you have to pay these obligations because dishonor of the obligations will have consequences most people can’t imagine. But what about Chafee’s performance after he became Governor? Did he kill 38 studios? Well, just how paranoid are you?
Governor Chafee having opposed the deal in the first place, nevertheless was handed it as a fact accomplished. All any Governor could do then was to cheer it on and wish it well. Should he have made it his personal role to supervise 38 Studios thereafter? No. He’s the Governor. That was not in anyone’s script. That’s what the EDC is for, our shark tank. But did he want it to fail?
Why would any governor who has to put up some numbers of an improving economy want 38 Studios to fail? They did fill a hole in on Empire Street when Blue Cross moved to Palais sur l'eau’ in order to more efficiently serve our health insurance needs. When you r Governor, you own all the good news. You really think the Governor couldn’t spin success by 38 studios into a nice photo op awarding recognition somehow? You really think that good employment and revenue numbers would be “asterisked” because some of it came from 38 Studios.
Frankly, when allegations are made that 38 Studio funds were being used to pay huge insider fees and install a sound system into an insider’s nightclub, and the place seemed to be run on “hope,” one can hardly fault anyone for rolling their eyes and saying there is nothing to be done but let the doors shut. Should the Governor have done more? Well it’s pretty unfair to say that if you are also exposing irregularities.
The opposition needs to ask itself a serious question. Do I oppose repaying the 38 studio bonds because it’s a sound move, or do I have some other ax to grind? The two Republican Gubernatorial candidates probably feel they are protecting the taxpayer. But more salient is the unfortunate problem that the party that is supposed to understand money is currently dominated by anti-Chafee animus and a desire to differentiate themselves from the Democrats on an emotional issue. They might just be afraid of losing the primary.
I personally believe both Republican candidates would protect the taxpayers--by paying the bonds back! They would wait a few days to announce that they changed their minds, but the truth is, they probably don’t have too. The only minds that matters is leader of the General Assembly, house proud Speaker Nicholas Mattielo and the Senate President Theresa Paiva-Weed. The Governor of Rhode Island has no line item veto, so if the Democratic Leaders in the General Assembly say re-pay, we are going to re-pay.
Losing track of finances
Once upon a time the Republicans were the party that understood money. One still has to marvel at the logic on the other side. Progressive’s hopes that raising minimum wage would restore the economy, even though a Democratic controlled House and Senate in 2008 and 2009 gave us Obamacare instead. I have no opposition to increasing minimum wage to $10.10. But we would do better to simply make keeping people at minimum wage for more than their training period unfeasible and because we have real growth, not command increases.
Every other wage would and will go up in relation and the bottom wage will still be the bottom wage. People on fixed incomes will feel the inflation, grandma’s CD’s will start losing values, real estate investors will smile as they raise rents and their mortgages debts are de-valued, all so that Democrat politicians can prove “they care.” But Republicans I thought could be depended on to be more economically astute than to indulge in the “make the truth go away” style of leadership. Unfortunately Rhode Island Republicans have for too long been too reflexive and too reactive. We cannot lead with the reptilian brain and our jaws snapping back at everything.
Lincoln Chafee is not going to be Governor much longer. We can’t make decisions on issues based on how we feel about Chafee or based upon our initial reactions to distasteful realities. We might say we are protecting the taxpayers, but the difference between stressed working poor and middle class comfort is good credit. You cannot say you are protecting the taxpayers while endangering their credit reputation. Rhode Island Republicans have to lead. We are expected to make the hard choices and tell the hard truths. Chafee, damn his poor beach fee policy, is still correct in saying we need to pay those bonds. And as for his suggesting that the two Republicans, if they could not face the need to repay those bonds, might not be fit to be Governor? Boom! That’s the kind of straight talk we like once in a while. Chris Christie probably wishes he got the chance to say that to a kindergarten teacher. Okay that was gratuitous. JUST KIDDING! But you get my point.
Mike Gardiner is an attorney in Providence and host of the Mic Gardiner Show, Tuesdays at 6 PM.