For many politicians, limits on their power to incur debt are an obstacle to be evaded rather than a concept to be honored. This is why some Rhode Island politicians want Rhode Island taxpayers to honor and pay a moral obligation bond for 38 Studios. Presently, there is a debate about whether Rhode Island should pay the moral obligation bond issued by the R.I. Economic Development Corporation (EDC) for 38 Studios. Over the next eight years, Rhode Island would pay at least $90 million if it honors this moral obligation bond. However, Rhode Island is under no legal obligation to pay this bond. Rhode Island is only legally required to pay general obligation bonds, which have been approved by the voters in a referendum consistent with the state constitution. Under Rhode Island law, the General Assembly may reject any request to appropriate funds toward a moral obligation bond issued by EDC. Also, it is unlikely that refusing to pay the 38 Studios moral obligation bond will cost taxpayers more in the long run than paying it. For example, if Rhode Island’s credit rating was reduced from AA to A, and its borrowing costs increased by 10 basis points, this would only mean an increase of a few hundred thousand dollars per year on a 20-year bond of approximately $209 million, the amount of bonds approved by Rhode Island voters in 2012. This is much less than $12.5 million a year for seven years to satisfy the 38 Studios moral obligation bond. If Rhode Island’s bond rating was dramatically downgraded, which is unlikely, and its borrowing costs increased by 100 basis points, this would still only mean an increase of a couple of million dollars per year on a 20-year bond of approximately $209 million. This is still less than paying $12.5 million a year for seven years to satisfy the 38 Studios moral obligation bond. Regardless, Rhode Island taxpayers should oppose making any payment on the 38 Studios moral obligation bond out of principle. Moral obligation bonds are merely a scheme used by politicians to avoid voter approval. Rhode Island taxpayers should stand up for the fundamental principle that the public should not pay for debt they have never approved.

Moral obligation bonds began in New York in 1960. New York Governor Nelson Rockefeller, a liberal Republican, had grandiose ambitions for government expansion. But the New York electorate resisted approving additional debt. Unwilling to limit his desires, Rockefeller turned to John Mitchell, a prominent municipal bond lawyer. To avoid the requirement of obtaining voter approval before incurring debt, Mitchell created the concept of the moral obligation bond. With moral obligation bonds, Rockefeller could incur debt for a housing authority and numerous other programs without obtaining voter approval through a bond referendum. Years later, after Mitchell was released from prison for his crimes associated with Watergate, he was questioned as to whether moral obligation bonds were simply a means of bypassing the rights of voters to approve debt in a referendum, and Mitchell admitted that this was “exactly the purpose” of moral obligation bonds.

Likewise, moral obligation bonds came to Rhode Island due to a crafty bond lawyer and an ambitious governor frustrated with an electorate’s refusal to approve more debt. After the adoption of a state investment income tax in 1969 and the adoption of a state income tax in 1971, Rhode Island voters became wary of approving bond referendums. In each of three elections between 1969 and 1972, Rhode Islanders rejected bond referendums for a low-income housing authority and bond referendums for economic development purposes. In 1973, James Skeffington, a lawyer eager for bond work, drafted legislation that created the R.I. Housing and Mortgage Finance Corporation (RIHMFC). This legislation avoided the need for a referendum by giving RIHMFC the authority to issue moral obligation bonds. Governor Philip Noel pushed the legislation through the General Assembly. A year later, in 1974, Skeffington helped to draft legislation creating the Rhode Island Port Authority and Economic Development Corporation, which was given the power to issue moral obligation bonds. Again, Noel pressed the legislation through the General Assembly.

Rhode Island’s first moral obligation bond to promote economic development was issued in 1974 for Fairmount Foundry, which sought to a buy the ITT Grinnell Foundry in Cranston. One of the two owners of the Fairmount Foundry was a “friend” of Governor Noel. In 1976, the foundry floundered and closed. Rhode Island taxpayers paid over $4 million for the cost of a moral obligation bond they had never approved. Twenty years later, in 1993, under Governor Bruce Sundlun, a moral obligation bond was issued for a biotechnology company called Alpha-Beta Technology. In 1999, Alpha-Beta Technology closed, and Rhode Island taxpayers paid nearly $30 million for the cost of a moral obligation bond they had never approved.

Today, Rhode Island taxpayers are being asked to pay for a moral obligation bond issued by EDC for 38 Studios, a video gaming authority, which voters never approved. If Rhode Island does not repudiate this moral obligation bond, politicians and their appointees will continue to issue moral obligation bonds. If this moral obligation bond is repudiated, it may prove too costly for EDC to issue moral obligation bonds ever again. Rhode Island politicians would need to win voter approval to issue bonds to promote economic development rather than relying on moral obligation bonds. There is nothing moral about moral obligation bonds. They are simply a means by politicians of putting the public into debt without its consent.

If Rhode Island becomes the first state to default on a moral obligation bond, it would set an example for other states. This would not be the first time. Back in 1843, Rhode Island was the first state to put a restriction in its constitution requiring that voters approve the incurring of state debt. This was to protect Rhode Island taxpayers from the costly economic development ventures that had bankrupted other states in the 1840s. Due, in part, to this restriction, Rhode Island became debt free by 1894. A few years later, however, voters approved the issuance of debt to construct a domed marble palace for its politicians called the State House. Unfortunately, since the State House opened in 1901, it seems that some politicians who work there have never ceased to concoct plans to increase the debt burden on the people of Rhode Island. Repudiating the moral obligation bond for 38 Studios would put an end to one of those schemes politicians devised to increase the debt burden on voters.