Contact: Brian Bishop, Legal Research, firstname.lastname@example.org; (401)439-7877
We know as legal scholars that the state has No Obligation to 38 Studios bondholders, only a vote of the people can create such an obligation, pronounced Brian Bishop, Director of Legal Research at the Stephen Hopkins Center.
But Moodys claims otherwise in a note accompany a downgrade of the 38 Studios bonds and a negative watch placed on the states credit ratings. They say verbatim about RIs debate over 38 Studios appropriations: selectivity regarding which obligations to honor leads us to question our confidence in the full faith and credit of the state.
If Moodys is right and these moral obligations exist, then this whole deal is unconstitutional and this house of cards should collapse of its own weight. To appropriate to such a purpose would itself be ultra vires, i.e. beyond the law.
You would think Moodys would recognize the importance of the legal setting to analyzing these bonds, but they appear overcome with the notion that a moral obligation is an existential promise despite repeated rulings by the Rhode Island Supreme Court that these deals are only constitutional because the legislature has the discretion to appropriate or not.
We have said all along that treating lack of appropriation as a default shows the moral obligation bond to be a two-faced instrument. One face that says emphatically in writing that this is not an obligation of the state, but another that whispers in public finance circles that these bonds are an obligation that must be paid unless the state is bankrupt, or on the verge.
Moodys proclaimed in a letter to the Hopkins Center that its role is that of an independent observer and analyst of credit risk. Yet after refusing to enter the states discourse for a year, Moodys publishes such a note on the eve of contentious budget votes over this appropriation.
The timing of the note, the inappropriate references to obligations; the apparent ignorance of widely publicized legislative proceedings that have stressed the states unyielding commitment to its general obligation bonds; the blithe refusal to recognize that a state action which Moodys praised, pension reform, reflected a selectivity regarding moral obligations; and the inexplicable downgrade of the actual 38 Studios bonds that the insurer is on record promising to pay cannot help but point to Moodys lack of independence and their sense that their role is one of white knight for the investor, not credit analysis.
To be fair, credit ratings agencies have been pilloried for not putting investor protection first in their ratings activity. But this does not appear to be a legitimate rating activity. Rather, when read with the flimsy beyond the law rationale, it looks like a value judgment on the states exercise of discretion.
It is incumbent on our Treasurer and Governor to object to this beyond the law smear on our credit rating although they may feel constrained from doing so as they have contributed to the notion of a beyond the law obligation. Thus it is incumbent on the legal authorities in Rhode Island, the Attorney General and the US Attorney to see if the careless rationale of this Moodys comment may have gone inappropriately beyond the law itself and harmed the state or investors.
Alternatively, if the belief in these beyond the law obligations is so firmly ensconced in the public finance industry and among state officials that Moodys cannot be faulted for these allegations, then it is the duty of the attorney general to bring the case to the courts to enforce Rhode Islands Constitution.