During the debate moderated by Bill Rappleye of WJAR Channel 10, invited participants included the Governor, Treasurer, EDC Management, Moodys Investor Services, John Chung, Professor for Bankruptcy and Contract Law, Roger Williams University, Robert Cusack, Portfolio Manager WhaleRock Point Partners, Elaine Heebner, Citizen panelist, Gary Sasse, Director, Hassenfeld Institute for Public Leadership, Bryant University and Tom Sgouros, Policy Analyst, RI Future.
The Stephen Hopkins Center and Occupy Providence are both opposed to spending Tax- payers money on the bailout and lean toward cutting the States losses and allow the insuring companies to pay the bondholders. While this sounds like perfectly good sense, the meeting of these Moral Obligation Bonds by the insuring companies will trigger a default. That default comes with consequences that are unknown at this time. There was a lot of speculation around the consequences however. The potential consequences debated included concern about the States Bond Rating, future State borrowing costs and the impact on the States fiscal profile, nationally. Not to mention the States ability to woo new businesses to Rhode Island that might create jobs if the State is known for backing out of its fiscal obligations. A marketing nightmare for whatever organizational structure put in place by our Legislature and Governor of the current EDC.
Prior to the debate we had an opportunity to talk with Elaine Heebner the Citizen panelists, whose concern is about the impact on people that rely on State sponsored services. Heebner pointed out to The Providence American and indeed later to the participants of the debate that &the people that will be hurt the most if we bail out the 38 Studio Bondholders with taxpayers dollars will be the poor, new immigrants, the elderly and children. A bailout equals a tax increase which undoubtedly will cause cuts to services in order to meet the debt, this is unacceptable.
Panelist John Chung of Roger Williams University Law School offered the participants with the reality of default. Any form of default by the State will in all probability be met with a lowering of the States credit rating by Bond Rating agencies like Moodys or Standard & Poors.
Tom Sgouros, of RI Future expressed concern that the EDC, the investors as well as the insuring companies and the banks let us down. Did these entities do real Due Diligence Sgouros went on to say that finger pointing is necessary to learn from our mistakes. So getting to the bottom of who knew what when and what was known is a necessary component of the problem, one that needs to be open and transparent to citizens of the State.
Gary Sasse of the Hassenfeld Institute at Brown University stressed the facts that there was a serious lack of management and due diligence to offer $100 million in Moral Obligation Bonds in the first place. A risk assessment is needed to answer the question poised today. Rating agencies like Moodys and Standard & Poors uses two standards when rating government credit practices 1) The ability of the entity to pay and 2) the willingness of the entity to pay. These standards when applied to our decision will determine the States bond rating in the future.
During the debate it was clear that no matter what we do as a State there is going to be some sort of negative consequence, from individual investors to Mutual Fund Buyers. Mutual Fund buyers are active purchasers of large amounts of our General Obligation, Railroad, and Education Bonds etc. The risk of any type of bond default, General or Moral Non-Binding will have a negative impact. However, it is clear that we do not have all the facts yet. The problem is that while the debate goes on our credibility as a State is further compromised, especially nationally. Hopefully a decision will be forthcoming in the very near future so that our credit rating is not hit to hard and investors do not begin to run from our general obligation bond offerings.
The bottom line is, do we pay a known amount now by setting aside future revenues to meet the debt or pay later in an amount that will include millions of exhaustive legal fees and administrative costs; all unknown at this time but to be added to the debt we are debating today. Ironically, Rhode Island has a choice that could not be more transparent to the public then it is today. Which standard do we want to invoke the Willingness or the Ability to Pay, or both? Our States future fiscal profile depends on it.