PROVIDENCE – On Tuesday, June 18, the Rhode Island Public Expenditure Council (RIPEC) will release comments on the state’s considerations related to bond obligation repayment. RIPEC’s analysis, which included an overview of Rhode Island’s current debt burden, explored the consequences of potential bond default on the payment for the 38 Studios loan guaranty. As illustrated by Moody’s recent decision to downgrade Rhode Island’s 38 Studios bonds, even uncertainty surrounding a potential bond default has detrimental financial impacts. This recent downgrade and other long-term impacts of default must be considered as bond payments are deliberated. The full report is available here.
Rhode Island’s unwillingness to support the 38 Studios moral obligation guaranty could negatively affect the perception of the state’s creditworthiness in the market. Consequently, the cost of borrowing will likely increase with investors’ perceived risk. Additionally, the state’s bond rating will be downgraded in response to an actual default, resulting in an increase of the cost of borrowing commensurate with increased risk. In addition to general obligation bonds, the state’s lower rating could also impact the cost of other state agency debt, municipal debt, or any other appropriation-backed debt. Over the life of the bonds, this could translate to millions of dollars in additional interest payment obligations for the state.
To uphold the state’s moral obligation, the bond repayment should be supported by the issuer’s taxing power. In this case, Rhode Island should pay for the bond in the short-run, to avoid the long-term burden of higher borrowing rates, limited access to capital, and a perceived lack of creditworthiness that would depress investment and increase costs associated with borrowing. Otherwise, Rhode Island’s stature in the bond market would be defined by the state’s failure to fulfill a moral obligation authorized by the General Assembly.