Schilling loan OK'd without final rules

PROVIDENCE, R.I. (WPRI) - Rhode Island signed away more than half of its brand-new loan program to Curt Schilling’s company before state officials had developed rules and regulations for it because it was too good a deal to pass up, a top official said Tuesday.

The R.I. Economic Development Corporation’s board voted Monday to guarantee $75 million in loans to Schilling’s video-game company, 38 Studios, to get it to move from Maynard, Mass., to Providence, and create 450 jobs by 2013.

• Related: How the Schilling loan will work (WPRI Blog)

By doing so, the board locked up 60 percent of the $125 million made available when lawmakers created the Job Creation Guaranty Program last month. Proponents say 38 Studios’ arrival will help the state become a hub for game developers and provide jobs amid 12 percent unemployment.

“The number one issue is 70,000 Rhode Islanders are unemployed, and I’m going to do everything in my power every day to get companies to grow, but to do it in a rational, reasonable means,” EDC Executive Director Keith Stokes told Eyewitness News.

The 38 Studios agreement has faced a firestorm of criticism from gubernatorial candidates, entrepreneurs and even sports columnists. “Instead of putting our eggs all in one basket, our priorities should be on real, long-term solutions,” Moderate Party gubernatorial candidate Ken Block said in a statement.

Stokes dismissed the criticism as election year politics. “The board of directors of the EDC, unlike candidates for office, are some of the finest business leaders in the state,” he told Eyewitness News. “They will do due diligence.”

New program created

The new law allows the EDC to guarantee – basically, to co-sign – up to $125 million in loans to private companies here through a Job Creation Guaranty Program. If a firm can’t pay its debts, the state will step in and make its creditors whole.

The law, which was strongly backed by Stokes, stipulates that guarantees should go to companies focused on “the sciences, technology, digital media, innovative manufacturing and other technologies.” Legislators also said the program should give priority to firms that would create high-wage jobs quickly.

The state’s guarantee makes it easier for companies to obtain financing at a lower cost. A similar program, the R.I. Industrial Recreational Building Authority, has been around since 1958 and was expanded in March. Stokes said the Job Creation Guaranty Program is designed to support technology firms that have “soft assets” such as patents, as opposed to machines and equipment.

The EDC’s board of directors has not approved the rules and regulations that will govern the new program yet, agency spokeswoman Melissa Chambers said Tuesday. “That will happen in the coming months,” she said in an e-mail. The regulations are largely a formality and will track the legislative language, Stokes said.

Schilling sought state

The EDC had originally asked for the Job Creation Guaranty Program to have authorization for up to $50 million in loan guarantees, which would “provide a level of flexibility that our [existing] capital programs had not had,” Stokes said.

But after Schilling reached out to state officials in February, the General Assembly decided to increase the program’s size to $125 million, Stokes said. That way, $75 million would be available for 38 Studios and the original $50 million would remain for new and existing companies in Rhode Island.

“Because of 38 Studios, it has given us the ability to have not a $50 million program but a $125 million program,” Stokes said. The $75 million will be available to other companies once 38 Studios pays back its loan, which has a 10-year term.

“People can talk about economic development, but I got it done,” Stokes said. “I’m not here to respond to sound bites. I’ve had a career where I’ve created jobs – that’s what we’ve done here.”

Failure to diversify

A private investor would never bet 60 percent of its available funding on a single company, especially one that does not yet have any products or revenue, said Angus Davis, a local tech entrepreneur whose startup Swipely raised $7.5 million in May.

“The overall idea of helping to get the credit markets flowing again and providing government … guarantees to help private lenders make private loans to private businesses – I think that’s a great idea,” Davis said. “But I don’t think putting 60 percent of your eggs into a single basket is a good idea at all.”

Stokes responded that there would not have been $125 million available for loan guarantees if 38 Studios had not come forward, which made lawmakers decide to expand the new program.

Stokes also said the $50 million that remains is the amount he had envisioned in the first place. “Six months ago there was no capital credit program like this. It didn’t exist,” he said.

Republican had doubts

Gov. Donald L. Carcieri signed the new program into law despite skepticism from his fellow Republicans. House Minority Leader Robert Watson, who voted against it, said in April it could lead to “all sorts of skullduggery,” according to The Providence Journal.

Carcieri’s spokeswoman, Amy Kempe, directed questions about the program to the EDC. In a statement Monday, the governor said the board conducted “extensive due diligence” before agreeing to guarantee the loan to 38 Studios.

“This investment in our economic development has the potential to spark the expansion of a new industry in our state and generate additional new business growth,” Carcieri said.

Davis said a better option would have been for the state to put new financing into the Slater Technology Fund, a state-funded nonprofit that makes investments below $1 million in local startup companies. The state also should have made sure that private investors wanted to put money into 38 Studios as a sign of the company’s viability, he said.