A bill Rep. K. Joseph Shekarchi (D-Dist. 23, Warwick) introduced last week would prohibit the Rhode Island Economic Development Corporations (EDC) from guaranteeing any loans and obligations, an action he said would prevent future loan guarantee problems, and protect taxpayers.
Shekarchi said the legislation isn't specifically about 38 Studios, but in a press release, he acknowledges the fact that "we certainly learned, painfully, from that situation what the financial implications can be when a quasi-public agency guarantees loans on behalf of the state."
While he believes the EDC has a role to play in the economic well-being of Rhode Island, he also feels that boundaries regarding certain fiscal matters need to be established in relation to the corporation, and does not think the EDC should have the authority to issue loan guarantees.
With 38 Studios, EDC's guarantee did not involve its own money. Instead, said Shekarchi, "it involved the full faith and credit of the state and its taxpayers."
This is the primary reason why he's looking to change things.
If approved, the bill would not impact the way the EDC functions. They would still be able to make contracts, loans, execute lease agreements, acquire property, undertake planning and development of projects, as well as other typical transactions.
"They can still do business as normal, they just can't do loan guarantees," Shekarchi said during a recent phone interview. "38 Studios was a loan guarantee, and I don't believe the state did its due diligence properly with the guarantee."
Originally based in Massachusetts, 38 Studios, an entertainment and IP development company founded by former Red Sox pitcher Curt Schilling in 2006, relocated to Rhode Island after securing $75 million in loans from EDC. By 2012, 38 Studios folded, leaving Rhode Islanders feeling cheated.
"The loan guarantee was for $75 million, but we're on the hook for a lot more than that because with the guarantee came interest obligations," said Shekarchi. "A $75 million loan guarantee turns into a $95 million to $100 million obligation to the state. My concern is that a guarantee does not have the same amount of due diligence as an actual loan, and a guarantee obligates us for more. That's why I'm against doing loan guarantees. If the state wants to be obligated to the money, they should give the money in the form of a loan."
Shekarchi's legislation, which has been referred to the House Committee on Finance, would simply omit a few words from existing state law.
But he isn't the only one looking at the EDC, as the Rhode Island Public Expenditure Council recently presented a report that Governor Lincoln Chafee requested, recommending changes in the way the Ocean State pursues economic growth, such as appointing a state commerce secretary responsible for shaping Rhode Island's businesses policies, as well as overseeing a new Executive Office of Commerce.
One independent study and report called for elimination of the EDC. It recommended replacing the EDC with a strategic office that answers to the governor, a research body based in the state's universities, plus a new board of directors that would collaborate with the private sector and administer programs.
In the release, Shekarchi said he hopes efforts by the governor's office are successful.
"The EDC is the point agency for promoting Rhode Island, attracting and growing businesses that create jobs for our citizens," he said. "We need a strong, well-functioning EDC, but not one that acts with the kind of uncontrolled autonomy that leads to situations such as the 38 Studios mess."
Co-sponsors of the bill include Rep. Robert B. Jacquard (D-Dist. 17, Cranston), Rep. John J. Lombardi (D-Dist. 8, Providence), Rep. Mia A. Ackerman (D-Dist. 45, Cumberland, Lincoln) and Rep. John J. DeSimone (D-Dist. 5, Providence).