R.I. lawmakers told 38 Studios bonds insurer could sue state [The Providence Journal, R.I.]

June 14--PROVIDENCE -- An insurance policy purchased as part of the state's failed investment in 38 Studios, a now bankrupt video-game company, was the focus for a House panel on Wednesday, as legislative discussions continue around whether or not to pay the more than $100-million debt.

House Oversight Committee Chairman Michael J. Marcello, D-<location value="LU/us.ri.sciate" idsrc="xmltag.org">Scituate, said he invited officials from Syncora Guarantee in order to clarify misconceptions about how an insurance policy in this situation works.

The New York-based firm was not involved in the 38 Studios deal, but it insures debt deals similar to the one Rhode Island used to attract the game company from Massachusetts.

Some lawmakers and outside experts have suggested the state simply not pay the debt, triggering an insurance policy issued by Assured Guaranty Municipal Corp. to the state Economic Development Corporation.

But the policy, the officials from Syncora testified, would only assure that those now holding the 38 Studios debt are made whole on their investments.

They said the insurance company would then have the right to pursue the state or other entities for compensation, as Marcello and other lawmakers have said in recent weeks.

"The most basic tenet they need to come away with is this: the insurance company pays, the debt is not extinguished," Marcello said after the hearing. "The insurance company will pursue any and all remedies to get paid back. Just because the insurance pays doesn't mean the state is eventually off the hook. It's not like normal insurance. It doesn't work that way."

House Minority Leader Brian Newberry, R-North Smithfield, questioned the value of the discussion.

"If you wanted a discourse on bond insurance, it was interesting," he said after the hearing. "But the question we face is should we or should we not pay these bonds. And this hearing did nothing to address that question. This was an attempt to address a side issue."

He and other lawmakers on the panel also cast doubt on Syncora Guarantee's credibility.

They noted that the company has been prohibited by federal regulators from issuing new insurance policies and had received a bond rating -- since withdrawn -- that was below "junk bond" status.

Randall Rose, a member of Occupy Providence that attended the hearing, argued that the threat of an insurance company lawsuit should not dissuade lawmakers.

"Those lawsuits always fail. That's something we shouldn't be afraid of. In this kind of deal, where it's not even a state debt it's the EDC's debt, the lawsuit doesn't win and we don't have any obligation to pay," he said. "This is not state debt because the [state] Constitution says that if we did not vote to put it on the ballot, then it is not state debt. They can't act like this is a moral obligation."

Wednesday's meeting was part of a series of hearings the House Oversight Committee has called to look into the 38 Studios deal.

On Thursday, the committee will hear from EDC officials about an independent third party it was supposed to hire to monitor and periodically assess the financial standing of the company.

The hearings also come as the 38 Studios debt has emerged as one of the most prominent issues in this year's budget debate.

Governor Chafee has proposed a budget with a multi-year plan to begin paying down the debt, including a $2.5 million payment in the year starting July 1.

Experts have said ignoring Chafee's proposal would be precedent-setting: no state has willingly reneged on a so-called "moral obligation" debt since the post-Civil War era.

But former state General Treasurer Frank Caprio suggested this week that lawmakers look to a more recent example in state history: Rhode Island's failed investment in the downtown Providence "Gateway Center," also referred to as the "American Express building."

Through the quasi-public Rhode Island Industrial Facilities Corporation, the state in 1989 issued some $23 million in bonds for the office building, which is near the train station by the State House. And, in a unique twist, the state retirement system bought the bonds.

The problem? The building's owners ultimately filed for bankruptcy, leaving the state essentially on the hook for the debt to its own pension system.

Caprio, who plans to run for his old office in 2014, says the pension system was never made fully whole. Yet the state's credit rating did not suffer.

"I think this issue has not been focused on because it doesn't advance the current position of the administration or the institutions involved in the deal," he said.

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