Chafee: No more tax money to 38 Studios

PROVIDENCE, R.I. (WPRI) - Governor Chafee said Friday he opposes further taxpayer assistance for 38 Studios other than tax credits that are already available, saying Curt Schilling's troubled video game company has gotten enough state aid and will need to turn to private investors to solve its cash crunch.

Also Friday, 38 Studios made an overdue $1.125 million payment to the R.I. Economic Development Corporation, one day after its chief financial officer tried to hand deliver a check to the agency that he acknowledged would bounce. The company wired $1.025 million and gave a check for the other $100,000 on Friday, Chafee said.

38 Studios officials told the EDC it would be able to make the payment as recently as April 27, Chafee said. "I think things were going well up until then," he said. Keith Stokes, who worked with former Governor Carcieri to push through the 38 Studios deal in 2010, resigned on Wednesday night.

• Nesi: RI taxpayers on hook for $ 112.6M
• PDF: New EDC fact sheet on 38 Studios
• Nesi's Notes: Full coverage of 38 Studios

The governor, flanked by David Sullivan from the Division of Taxation and Rosemary Booth Gallogly from the Department of Revenue, gave a briefing during a packed hour-long news conference Friday afternoon at the State House, five days after the 38 Studios saga exploded into a public crisis.

Nearly $50 million gone now

The gaming company, which relocated to Providence from Massachusetts last year in return for a $75 million taxpayer-guaranteed loan, has so far received $49.8 million of the loan proceeds, with the rest set aside as a reserve to pay off bondholders. 38 Studios says it's blown through the entire $49.8 million, Gallogly said.

Rhode Island taxpayers could be asked to pony up money to pay back the bondholders on 38 Studios' behalf as soon as next year. If the company is unable to make a $12.8 million loan payment next May the EDC will have to tap a reserve account; if that happens, Chafee is required to ask lawmakers to replenish the account.

38 Studios released its first game - "Kingdoms of Amalur : Reckoning" - in February to solid reviews and sales. But Rhode Island is funding its second game - tentatively named "Project Copernicus" - and Chafee said that game's release date has now been pushed back from September 2012 to June 2013, more than a year from now.

Late Friday, 38 Studios released a two-minute video previewing Amalur, the setting for "Copernicus."

The company has told state officials its operating costs are running at more than $4 million a month. The company employed 379 full-time employees as of March 15, including 288 in Rhode Island, according to bond documents obtained by WPRI.com. Workers at its Empire Street headquarters on Friday declined to comment.

Schilling wants tax credits

Chafee's attention quickly turned to Rhode Island's film-and-television-production tax credit program, which also covers video game companies, and indirectly could provide 38 Studios with some badly needed cash after it failed to pay its employees this week.

38 Studios has applied for roughly $8.7 million in tax credits based on its expenses last year and wants to sell those to another firm, which could use them to offset its own tax bill. The company initially sought $2.2 million but filed a new application Friday for $6.5 million more. The new application is now being reviewed.

Chafee said he told Schilling and other 38 Studios executives the company needs to raise money from the private sector to keep its doors open because Rhode Island taxpayers have already give the firm "a very good deal." But it's unclear whether there is an appetite among investors to put additional money into the company.

"Basically," Chafee said, 38 Studios' problem is that "access to private capital hasn't materialized." He declined to say how much more money the company estimates it will need between now and the middle of next year to develop and release "Copernicus." The first game was made at a studio in Maryland 38 Studios bought in 2009.

RI risked 'huge investment'

The governor said he has pushed back throughout the week against proposals to give more state assistance to 38 Studios. "It's a balance of making sure 38 Studios is successful so we can recoup our huge investment, and also not getting further exposed," he said.

A document the governor's office released said 38 Studios has applied for another $12 million in film tax credits for 2012. Chafee on Friday proposed changing the tax credit rules, saying firms getting taxpayer loans shouldn't be able to also get tax credits. "The basic problem is using state money to access state money," he said.

38 Studios was ineligible to receive the tax credits until it got out of default status by making the $1.125 million payment. Sullivan said the EDC has hired the consulting firm Braver to conduct an independent audit of 38 Studios' finances to determine whether it's actually spent the entire $49.8 million, making it eligible for the credits.

Schiling, who has refused to answer questions from reporters, appealed to the EDC board for more assistance at an emergency meeting held Wednesday. "I was very apprehensive about what might happen at that meeting," Chafee said. The board took no action Wednesday and is scheduled to meet again on Monday afternoon.

No 'vindication' for Chafee

Chafee, who opposed the 38 Studios deal as a gubernatorial candidate in 2010, said his main goal moving forward is to look out for taxpayers' best interests. "I'll do anything under the law to protect the taxpayer and also not break the law," he said. "My goal is to protect the taxpayer now." He added: "We're in deep."

"I don't feel any vindication," Chafee said later. "I just want to get the economy going, get our people back to work, save our cities and towns." Carcieri has not contacted Chafee to discuss the problems with the loan deal the previous governor approved over his successor's opposition.

Executives at Providence Equity Partners, the powerful private-equity firm based in Rhode Island, were among those who warned Chafee about the difficulty of succeeding in the game industry. The governor suggested Schilling has been reluctant to allow others to take an equity stake in 38 Studios in return for more money.

"The outside experts who know this industry said the only time you get involved is if you're going to have an equity stake," Chafee said. The 2010 deal with 38 Studios negotiated by Carcieri and Stokes didn't give Rhode Island taxpayers such an equity stake in the firm.

Asked whether Rhode Island would ever do a 38 Studios-style deal again, Chafee replied: "Never, never - not on my watch. I said from the beginning it was a risky enterprise." Gallogly said she's briefed the three major agencies that set Rhode Island's bond rating about the situation and plans to keep them apprised.

Kane not getting EDC job

Chafee said he hasn't given significant thought yet to finding a replacement for Stokes, the EDC leader who resigned Wednesday. Colin Kane, chairman of the I-195 Commission, was never formally offered the job and the governor said he only broached the possibility of Kane taking over on an interim basis in a conversation.

William Parsons, the EDC's managing director of business and community development, is overseeing the agency's day-to-day operations at the moment. Chafee said he doesn't want to abolish the EDC but does want to put together "a good supportive team that concentrates on growing the companies that are here already."

The latest developments on 38 Studios come the same day the U.S. Labor Department reported Rhode Island's unemployment rate rose to 11.2% in April, the second-highest in the country after Nevada. The jobless rate fell to 6.3% in Massachusetts, which turned down Schilling's request for backing before he got help from Rhode Island.

Schilling took to Facebook overnight and posted a brief message thanking his supporters. "To all the prayers and well wishes to the team and families at 38, God Bless and thank you!" he wrote. "We will find a way, and the strength, to endure." Schilling also said it's "not true" that he's been paid back for his investments in 38 Studios.

38 Studios has also removed a list with the names of its board of directors from its website without explanation. Asked whether he's satisfied by the company's communication with state officials, Chafee said: "That's always an issue."

Chafee did say he's "buried the hatchet" with Schilling personally after mocking the ex-pitcher's famous "bloody sock" during the 2010 campaign. The governor said he visited 38 Studios in Providence after taking office.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi

Tim White contributed to this report.