An informed population should take offense at statements such as those Katherine Gregg reported Governor Gina Raimondo’s administration making in the Providence Journal:
Aberger’s explanation: “The key feature of a revenue bond is that its guarantee of repayment is solely from revenues generated by a specified revenue-generating initiative, in this case, the user fees on large commercial trucks. By utilizing this revenue bond structure, under no scenario would the State of Rhode Island be ‘on the hook’ for repaying the bonds.”
This was Raimondo’s answer when asked on WPRI’s “Newsmakers” what would happen if the toll revenue fell short: “If that were to happen, you’d have to increase the toll … . Taxpayers will never be on the hook for this bond.”
We just learned the contrary lesson with 38 Studios. On paper, investors accept the risk that the revenue of a revenue bond won’t come in or that a public entity will not honor a moral obligation on a moral obligation bond, which is considered a type of revenue bond, but it’s a Wall Street–State House scam. Investors get a better return on their investment to account for the supposed risk, but politicians are scared stiff of losing their ability to subsidize taxes with debt, and the investment mob is perfectly willing to play the bully. The 38 Studios story even made it to the Wall Street Journal:
Bonds tied to Curt Schilling’s bankrupt video game company are all that stand between Rhode Island and a downgrade to junk status, according to a report released by the state’s Division of Administration.
Failing to make payments on $75 million in taxable bonds sold in 2010 to attract the former Boston Red Sox pitcher’s 38 Studios LLC from Massachusetts may result in Rhode Island’s downgrade to the nation’s lowest state rating and cost $36 million more than paying debt service under the best-case scenario, or as much as $361.8 million under the worst-case, according the report from Minneapolis-based SJ Advisors LLC. The so-called moral obligation bonds left the state on the hook when the company entered Chapter 7 bankruptcy in June 2012.
“We expect that the rating agency reaction would be swift and severe, and that there will be a material and adverse effect on both the interest rates that the state pays when it issues debt and the market value of outstanding Rhode Island bonds,’’ the report said.
This is probably a bluff that politicians should call. The investment market needs investments that are just about sure things, like states’ voter-approved general obligation bonds, and grading them as “junk” would likely do damage to the credibility of the ratings agencies. But politicians’ real fear is that non-general-obligation debt will become impractical, and they’ll lose the ability to take on hundreds of millions of dollars of debt without voters’ approval.
Make no mistake: Rhode Island taxpayers are backstopping this debt one way or another. The state’s shot-in-the-dark estimate is that the proposed tolls will lead 25% of truck traffic to simply go around the state. Rhode Islanders should expect that estimate to prove low, meaning that tolls will come in short. Increasing the tolls on trucks will only make matters worse, perhaps to the point that truckers based in Rhode Island will move their operations over the border.
That means tolls on passenger vehicles, which is effectively putting taxpayers “on the hook” for the debt. If that proves politically impossible, for whatever reason, then the governor and legislature will turn to other fees or taxes. Count on it.
The cynical view is becoming easier and easier — namely, that the RhodeWorks program was designed to satisfy Raimondo’s two key interest groups: the Laborers union and Wall Street investors who want big returns on low-risk debt that (I’d argue) violates the state constitution.