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RI lawmakers still mulling 38 Studios bond default

David Klepper, Associated Press

PROVIDENCE, R.I. (AP) -- Rhode Island lawmakers on Thursday will take a second look at what would happen if the state refused to pay what it owes for its failed investment in former Red Sox pitcher Curt Schilling's bankrupt video game company.

The House Finance Committee has invited state and municipal bond expert Matt Fabian to discuss the implications of defaulting on the more than $100 million it owes for the 38 Studios deal. The meeting comes after a small number of state lawmakers suggested the state default and let insurance on the bonds pay bondholders.

Fabian will "address the pros and cons for the state" of not paying what it owes, according to Larry Berman, spokesman for House Speaker Gordon Fox. "The presentation is intended to provide insight that a neutral, expert third-party can bring to the topic."

The budget proposal before the General Assembly includes a $2.5 million bond payment in the next fiscal year, followed by annual payments of $12.5 million. House Rep. Karen MacBeth, D-Cumberland, and others have called on the General Assembly to block the payment.

On Tuesday, state Republican Party Chairman Mark Smiley and Moderate Party Chairman Ken Block — also a candidate for governor — joined the list of those favoring default. Block said the state should hold off on paying while the state's Economic Development Corp. is suing 38 Studios executives, Schilling and some of its former employees over the loan guarantee.

The EDC board approved the $75 million loan guarantee for 38 Studios in 2010 with the goal of bringing high-paying jobs to the economically struggling state. But the company folded last year, leaving the state on the hook for more than $100 million, when interest is factored in.

Gov. Lincoln Chafee and Treasurer Gina Raimondo both oppose defaulting on the loans. Chafee spokeswoman Christine Hunsinger said the governor has not changed his mind, despite the increased number of people favoring default. She said Chafee believes that the state must honor its debts and that bond insurers could sue if the state defaults.

The EDC is also against the idea, with agency Chief of Staff John Pagliarini warning that defaulting on the bonds could make it harder to finance economic development projects and hurt the state's bond ratings.

"Rhode Island needs to meet its obligations," Hunsinger said.

While only a handful of lawmakers have publicly supported defaulting on the bonds, the question has hung up negotiations over the entire $8.2 billion budget proposal, which lawmakers must approve by July 1, the start of the new fiscal year.

Thursday's meeting with Fabian will be open to the public, but no members of the public will be allowed to address lawmakers. It will be the second time this year that the House Finance Committee has reviewed proposals to default on the bonds.

Fabian is managing director for Concord, Mass.-based Municipal Market Advisors, a research firm that provides analysis on the municipal bond market.