Carcieri: State may not need to pay up

EAST PROVIDENCE, R.I. (WPRI) - Former Governor Don Carcieri is suggesting the state consider not paying investors back for the money borrowed to help Curt Schilling's now-defunct video game company.

Carcieri – a retired banker – said during a wide-ranging interview with Eyewitness News that investors "knew the risks" when they poured millions of dollars into bonds that were used to invest in 38 Studios.

"If they felt this was a slam dunk, that the state of Rhode Island was going to be paying these bonds, then why would we be paying 6 percent?" Carcieri said during a taping of WPRI 12's Newsmakers. "That’s why it’s called a moral obligation."

• Watch full interview with Carcieri

Carcieri added a lot of work would have to be done before the state make's that decision.

State leaders, including Governor Lincoln Chafee and General Treasurer Gina Raimondo have said it would be a bad idea to default on the loan. In May, the pair informed Moody’s Investors Service that state taxpayers will bail out investors who purchased bonds to finance 38 Studios.

"The credit agencies and future bondholders look at our track record: have you always made those debt service payments and we're able to say 'we have,'" said State Revenue Director Rosemary Booth Gallogly in a recent interview before Carcieri made his comments. "If we default on this obligation I think it really threatens the state's credit rating."

The R.I. Economic Development Corporation sold $75 million worth of moral obligation bonds in 2010 to finance 38 Studios. They differ from the more familiar general obligation bonds because with moral obligation bonds a state only pledges that its governor will ask lawmakers to use taxpayer money to pay bondholders; with general obligation bonds, the state pledges its full faith and credit toward repayment.

State officials are looking into the possibility of refinancing the bond to lower future payments.

The R.I. Economic Development Corporation put in motion the $75 million 38 Studios deal just days after the General Assembly created a new $125 million loan program in June 2010. The company defaulted on an interest payment to the state in April 2012 which triggered a series events ending in the ill-fated company laying off roughly 300 employees and filing for bankruptcy.

Tim White ( twhite@wpri.com ) is the Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter: @white_tim

WPRI.com reporter Ted Nesi contributed to this report